Putting In The Fix

Federal Loan Program Rolls Buying, Rehabbing Into One

December 03, 1995|By David Enna, Charlotte Observer.

If you ever watch late-night television, you've seen those real estate ads: A guy in a polo shirt, with a swimming pool glittering behind him, describing how you can buy a house with ABSOLUTELY NO MONEY DOWN!

Yeah, sure. But what if there really was a way to buy a fixer-upper house with zero money down, and even include all renovation costs in the mortgage?

This isn't the product of some TV huckster. It is a loan program, called Section 203k, offered by the Federal Housing Administration. And although it has been little used in the past, the Clinton administration is hoping to make 203k the cornerstone of its program to increase home ownership.

"This is a way, without using much government money, to renovate houses and put first-time home buyers into homes," said Gene Poore, an appraiser in Charlotte, N.C., who works with the FHA on approving 203k houses.

The basic idea is that fixer-upper houses, often priced well below market value, are a great source of affordable housing. Once repaired--with a new roof, modernized kitchen, new painting and carpeting--the market value can soar.

But in the past, financing a fixer-upper house was difficult. Many lenders required the repairs to be made before closing, or required purchasers to finance the repairs separately. That was impossible for buyers strapped for cash.

The 203k program solves those problems. It allows a first-time buyer to finance everything--purchase price, renovation expenses and closing costs--in one federally insured mortgage, generally with a very small down payment.

The program also works for real estate investors, who can finance the purchase, renovation and closing costs in one mortgage with a 15 percent down payment. After the investor finishes repairing the house, the 203k mortgage can be assumed by a first-time buyer with zero money down and closing costs of less than $1,000.

"That's the real beauty of the program," said Val DeVine, president of Best Rate Mortgage in Charlotte. "It's the perfect partnership between first-time buyers and investors."

One negative, however, is that the program is incredibly complex. A summary of the FHA guidelines covers 25 single-spaced pages.

"Lenders have shied away from 203k because it is so confusing," DeVine said. "We recently closed a 203k loan for $38,000 and found that we had 140 man hours in processing it. You can't make much money doing that."

One innovative way of using the 203k program, used by Charlotte Realtor Bill Kennedy, puts the investor and home buyer together early in the process. Kennedy lines up a qualified first-time buyer and works with an investor to locate a fixer-upper property.

"It's the only loan package that can work for both the investor and the home buyer," Kennedy says.

The investor puts up the 15 percent down payment, takes out the mortgage, buys the property and oversees the repairs. When the house is finished, the buyer assumes the 203k mortgage, with only a small up-front cost.

If all goes well, the investor is left with a tidy profit and the home buyer has a repaired home, a 30-year mortgage and a small cash outlay.

Here's a simplified example of how it can work, drawn from FHA guidelines:

Let's say an investor finds a run-down property for $30,000 and the cost of rehabilitation will be $25,000. The investor puts down 15 percent ($8,250) of $55,000, the total cost of the acquisition plus rehab.

An appraisal--done by an FHA-approved appraiser--finds the after-rehab value of the house will be $70,000. According to FHA guidelines, that means the mortgage for an owner-occupant who will assume the loan can be approximately $67,900.

The investor closes the loan for $67,900. An escrow account is formed, containing the $8,250 down payment, $25,000 for repairs and $12,900 in excess loan proceeds.

Once the repairs are finished, and approved by an FHA appraiser, the loan is assumed by the first-time home buyer. At this point, the $21,150 remaining in escrow is released to the investor.

A key negative of the 203k program is that the interest rate generally is higher than the market rate. A typical 203k mortgage today has a 30-year, fixed-rate of 8 1/2 percent, DeVine said, about 1 percentage point above the current market rate.

On the other hand, the FHA generally gives buyers assuming a 203k mortgage more lenient underwriting standards, making the assumption easier for buyers with some credit problems.

To get more information on the 203k program, plus the names of participating lenders in your area, contact the Department of Housing and Urban Development at (202) 708-2720. Or write for the 203k brochure from HUD, 7th & D Sts. SW, Washington D.C. 20410.